Fed on Path to Hike Rates, Trajectory Unclear

You can also listen to our radio show at two pm Eastern Time on Bloomberg Radio, or watch us on YouTube search Bloomberg clovel News. Dr Stephen Skanky is chief economic Advisor at Keel Point. He's also a former US Treasury and White House National Security Council staff member. Doctor Skanky joins us on the phone from Cape Canaveral, Florida. Doctor Skanky, how are you. I'm well today, Thanks, and it's great to be with you. Yeah, it good to

be with you. Two. Before we get to what the FETE is going to do, I do want to talk Russia and Russia's invasion of Ukraine with you because we haven't had a chance to speak about that. Since you were last on our program and you were on the White House National Security Council, a staff member of the White House National Security Council, so I wanted to get your read on it. It's a humanitarian crisis with more than two million refugees fleeing Ukraine. Um, and it's not

clear that there is any end in sight. Um, how are you reading into it? Well, it's it's an extraordinary human tragedy and also a tragedy for the geopolitical world order. Um. Everyone had thought that we had gotten beyond invasion and land wars in Europe in particular as we came into this century of having experienced, you know, a hundred billion lost lives in the in the twentieth century as a as a result of conflict like this. So so that

that is surprising. What's been amazing about it, though, is that it really has a weight and our European and Asian allies to the to the real threat to the geopolitical and economic system as a result of this. Uh. What's happened in Germany and the twenty seven EU countries has been absolutely amazing in terms of their recognition of the jeopardy and the things that they need to do to get that turned around for their own benefit and

for the safety and security of their own countries. And Dr Skinky, I feel like it also has awakened many people to just how important Russia and Ukraine in that entire region is to you know, supplying the world with energy and you know, producing food and grains for the entire world. I mean, it feels like everything physical, the price of it has just soared in the past few weeks.

And I mean, to bring it back to the economy, I'm curious what you think the lasting read through to inflation could be, because it was right around this time where that economists had initially predicted that inflation would finally start to crust a little bit. That's right, Katie. Uh. But you know, Russia exports seven and a half percent of crude and refined products before the war in what was already a tight energy market, and so to to think about taking any or all of that offline is

is startling and jarring. Hence the Biden administration's effort to do something with the countries that are already otherwise offline and to get production geared up in the United States, all of which takes time and all of which takes infrastructure to get a repositioned into the countries in Europe that need it. You know, likewise, on grains, Russian Ukraine produce of the world's week supply, significant amount and not

something that you change overnight. Fortunately, the US is an agricultural powerhouse and has the ability to turn its attention to replacing some of that, but over time only, and in the meantime you have to depend on on the stocks that are there. Aluminum the same way, big producer and exporter of aluminum, and of course natural gas to Europe much harder to replace because the infrastructure or re gassification of exports from the United States just takes time

to put in place. So Dr Skinky, get us to tomorrow and what you expect we'll hear from uh FED chair J. Powell. Widely expected that they announced an interest rate increase of basis points that seems to be priced in at this point, and why they agreed upon um. But what surprises could we see? I think the big surprise will will will come in what they say about

the trajectory after this. There has been a certain amount of public commentarity since the January F and C meeting with some misunderstanding as to what was said and some expectations that they need to go faster, But I think Chairman Powell was was preceded this and and stepping out to try to call markets and set expectations that they're going to move deliberately as we go along on this, fully understanding that the impact of what's happening in Russia

and the Ukraine is really hard to pass through the system right now, and what financial markets and even the political system in the United States what it needs right now is just stability predictability. But the big surprises will come in their discussion about when does quantitative tightening begin and what does the dot plot looked like for the increase in interest rates going forward to the rest of

the year. You know, the market's been calling for nine, well between seven and nine quarter percent increases, but that has been saying four or five. But we'll we'll find out soon enough as to where they're thinking has moved just as a result of what happened over the last

couple of weeks. Dr Stephen Skanky, it is always great to chat with you ahead of FED day, Chief Economic advisor at keel Point, also former U s Treasury at White House National Security Accounts Member Member Stephen Skanky joining us on the phone from Cape Cannaveral, Florida. This is Bloomberg Radio, and this is Bloomberg Business Week. You're listening to Bloomberg Business Week with Carol Messer and Bloomberg Quick Takes.

Tim Stinovic on Bloomberg Radio. Well, I told you we're going all in on Russia's invasion of Ukraine, and it not just includes the latest from Ukraine and the international community's response, but also the economic impacts not just in Ukraine and the world, but also what's going on in Russia. To that end, Today's Big Tag focuses on Russia spiraling towards a billion dollar debt default nightmare. This story written by Eliza RONALDS. Hannon and a couple other of our colleagues.

Aliza's high yield and distressed debt credit reporter for Bloomberg new She joins us on the phone from Boston. Eliza, what happens tomorrow to Russia's debt that becomes due? Well, what happens tomorrow is a bit up in the air. Still, um, the big question has been one or the most immediate

question has been one of technical default. Really, so the Kremlin has uh, you know, outlawed or restricted abilities of the sovereign and other companies to pay foreign foreign debt in the foreign currency, and any sort of payment made in roubles which have been the order would be a technical default. But what really investors are talking about at this point, if you ask them what their take is

on the outcomes here, it's less. It's only a matter of time before the defaults become a matter of actual solvency as opposed to technical ability to pay, because Russia is completely cut off from its trading partners now and revenue will dry up, cash will become non existent. And so let's dig into that. So the worst case scenario here, you know, Russia defaults, what's its stake for Russia's economy if you know it's then cut off from its trading partners.

You know, people investors uh don't want to invest in its debt anymore. Right, it will really be a negative feedback loop that will, as we said in the story, really set the economy on its on a road to disaster. Um you're seeing, you know, part of the reason that people are pulling away from the debt is because of downgrades to the credit rating, which of course have to do with all of the event risk related to the invasion,

but also the high inflation and the contracting economy. But because of the high inflation and contracting economy is the m and because of the debt downgrades, the economy fair is even worse. And so it's it's really on a spiral, Eliza, forgive me, but you know, on the on the topic of Russia's invasion of Ukraine, we're just hearing from President Biden. He says that he will speak more about Ukraine on Wednesday, that's tomorrow. He did make some comments moment ago saying

that it's getting harder to get supplies into Ukraine. He's speaking right now at a federal government funding bill signing event. For more, just go to life, go on the Bloomberg terminal, Eliza, isn't isn't Is this by design? What could happen to to Russia, to Russia's economy, what could happen to Russia's debt? Is this partly by design? When it comes to sanctions and cutting Russia off as much as as as the United States and the rest of the world can do.

Certainly sanctions are designed to inflict pain, and this will be painful for Russia's economy and and Russian and the state the government. Of course, you're also looking at a lot of pain to be absorbed among global investors. Russian credit and and corporate credit in Russia is quite widely held throughout funds all over the market because until recently Russia was a big part of the index for that

many funds tracked it was also investment grade rated. So it's the type of funds that aren't you know, very risk friendly, aren't necessarily you know, trying to make a big play on the outcome, but are really passive holders. And because of how fast everything unfolded, they didn't get a chance to sell and you know, let the distress guys come in. They're really holding the bags bill even

as stuff plummet in value. Well, that's what I want to get into a little bit of you know, what the ripple effects could look like here, and you know, are there any potential contagion risks when it comes to you know, other emerging markets and their their sovereign debt markets.

I think that if anything, um in s who are pegs to an emerging market index or other indexes that involved Russia will in fact need to block to other sovereign credits and other emerging markets in order to simply balance their portfolios because they did lose such a chunk of their benchmark overnight. Almost so, I don't know if there's so much contagion risk um explicitly, you know, it's

a quite limited event. Um. The risk of you know, similar counterparty problems with nearby or related countries isn't isn't very far reaching at least um. But what might be more interesting to look at in the immediate term is where investors go to to put their money. Eliza ronalds Hannon is one of the authors of Today's Big Take. She's High Yield and Distressed Distress Credit Reporter. You can read Aliza's story and more from Bloomberg The Big Take.

You can do that at Bloomberg dot com and of course, on the Bloomberg terminal. You're listening to Bloomberg Business Week with Carol Messer and Bloomberg Quick Takes Tim Stinovic on Bloomberg Radio. Coming up in the upcoming issue of Bloomberg Business Week Magazine is a deep dive into cerebral Maybe you've heard of it, maybe you haven't. It's backed by soft Bank, It's promoted by Simone Biles. The CEO has actually even been on Our Heir Our air here on

Bloomberg business Week magazine. Cerebral has built the fastest growing online mental health business. Former employees, though, say the rapid expansion comes at the expense of patient care. The story by Pauli Mosen's and Caleb Melby. Caleb Melby's financial investigations reporter for Bloomberg News. He joined us on the phone from from Brooklyn. Joe Weber is editor at Bloomberg business Week. He's with us in the Bloomberg Interactive Broker studio in

New York. Joel, I want to start with people. For people who haven't heard of Cerebral UM. What is it? Well, first of all, this story is in the current in the current excuse me? When is time? What is time? What is um? Cerebral? If you're on TikTok, you will

definitely know it um. I've been fed the ads on Instagram and it's basically a telehealth company that during the pandemic, there are some policy changes that suddenly allowed you to get a d h D medications without having in person appointments and cerebral startup very young has been a huge beneficiary of these policy changes UM and has basically accelerated into uh, you know, this mental health crisis by allowing people to have telehealth appointments and get prescriptions basically you know,

almost on demand and via um online prescriptions as well, depending on what state you're in. UM. But you know there's a downside to all this too, which is all of a sudden, we're dealing with mental health issues and telehealth and you don't have those normal check ins that most of the time we've had, and in talking to employees and former employees and patients of cerebral Pauli and Kayle have found some some troubling elements of their business practices.

So so break that down, Caleb, what what were the big takeaways that that you found as you um did a bit of an autopsy here, Yeah, I mean, UM you the a d h D medication point you highlight, Joel is UM definitely among the big ones. Basically prior to the COVID nineteen pandemic, UH, you weren't able to prescribe controlled substances and a telehealth setting and uh. That was the product of a two eight lock called the Ryan Hate Act, which which said you you couldn't issue

controlled substances uh. And that includes amphetamines like adderall and also um benzo's like um uh zen ac and klono pannon. So for the first time companies could do that, and there's been a race to do that. As you can imagine a lot of people working from home, going to school from home, sitting behind computers all day, not getting

to socialize. They've become distracted, they've become irritated, they're procrastinating, um, which are all symptoms potentially of a d h D or you know, a myriad other things, including exactly um uh. So that kind of uh supply side drummed up. You have companies like Cerebral meeting that with these ads that Jewel was describing that you know, it can be quite aggressive.

I think it's fair to say like people dancing with boxes of pills uh and similar and essentially asking have you ever thought, um, that you might have a d h D. So we we talked to nurses who works for this company who you know. Once that business line got up and running, so's deluge of clients looking for a d h D medication, and the structure is under which they were asked to operate half an hour primary appointment. People expected the drugs after that first appointment, because that's

kind of what they've been to believe by these ads. Um, they get irate if they don't, and they say, it's very hard to diagnose in a virtual setting in half an hour. And what kind of uh response did they you know, have have you know a employees had when dealing in these situations, and then also the customers that you you spoke with. Yeah, so so for employees, UM, uh you know, uh, A lot of the folks who left,

you could almost think of them as conscientious objectors. They saw kind of all these pressures on their prescribing practices, and for some of them, they didn't consider it worth it to continue to work under those circumstances. Some described fear of uh losing their licenses because of the situations they were put in, et cetera. Uh So, so they

often moved on. Um, there's a whole host of support staff who uh you know, felt unsupported as the company's profile skyrocketed, doubled its evaluation alone from uh, I'm sorry, quadroubled it from June to December of last year to four point billion UM. Basically unable to keep up with this demand. And uh, patient experience varies widely. Some people really need more more tender, loving care than they can get under this kind of touch and go environment, UM,

and felt like they didn't get it. We talked to somebody who you know, her first ary employments average nineteen minutes each UM when she joined the service. And for other people, and these are people who are either geographically remote or you know, or uninsured. Um, they can have

positive experiences. If you have a prescription already and you can't get it filled, and you need somebody refilling, and you live you know, far away from you know, a psychiatrist or other psychiatric prescriber, Uh, this this can be a huge opportunity. Yeah, it's also a big question I think for what regulators are are going to think moving forward. We only have twenty seconds left, Caleb, But um, what can you tell us about the way that regulators are

potentially looking at this? Look you tell what health has been seen as a huge boon. I think that continues to be the predominant narrative. I think they're going to try to find a way to try to make sure that people are able to do this in the future. The really important story. Caleb melb Caleb Melby is financial investigations reporter for Bloomberg News. He joins us on the phone from Brooklyn Joel Weber, editor at Bloomberg Business Week,

with us in the Bloomberg Interactive Broker Studio. Check out the story. It is in the current issue of Bloomberg Business Week magazine. You can read it now on the Bloomberg terminal and at Bloomberg dot com slash business Week. Yeah, but you let me drive? Oh no, no, no, please, I'll do. I want to try. It's good question. The drive to the clobe me a thing radio, it's the drive to the clothes. We are just over ten minutes away from the close of trading on this Tuesday, March fifteen,

stocks just coming down from their session Highsma, Katie. We've got a great voice to comment on all things markets today and fed tomorrow. Yeah, Tim, I'm excited about that one. We're joined now by Liz Young. She is head of investment strategy at so Far and Liz, I'm excited to talk to you because I've been thinking about the old curve a lot. I know you've been thinking about the yield curve a lot, And I'm curious how much do you think that the FED is thinking about the yield

curve right now? Because if I look at the two tens yield curve, I see it about thirty basis points, which seems very very flat. Yeah, I think about the yield curve more than I'd like to, and I think the FED probably does too, especially at these levels. So as you mentioned that spread between the twos and tens, I mean it was below thirties for a period of time today, and I think that that is a pretty fragile place for us to be heading into a hiking cycle.

And the FED may not care as much about the equity market correcting and some of the drawdown that we've seen, especially coming off of all time highs, probably felt like we had some room to draw down. But when you look at what happens with the yield curve, what you don't want to see is a true inversion. Now, the good thing about if we get close to inversion, it

doesn't really count as a true inversion. That's a signal until it's lasted for a reasonable amount of time, and it was a big enough spread of an inversion, So reasonable amount of time. I mean, this is an opinion thing,

but I would say at least a month. I think it has to stay inverted for a month, and it has to be let's call it twenty five basis points at least, right, So sometimes you might get an intra day inversion where it just kind of dips below zero for a second and it comes back and it never really closes inverted, or maybe it inverts by a very small amount for a couple of days. I don't think

that counts as a true signal. Okay, So help us think about this in the context of what the Federal Reserve is Board is talking about right now, the decision that we'll here tomorrow at two pm Wall Street time, and uh, what investors really need to understand about the tough task that the FED has ahead of it. Yeah,

I mean I do not envy the FED situation. I think they are up against a lot of different challenges, especially because we've put as investors and when we talked about the economy, we've put so much pressure on the FED to be able to solve a lot of the problems and frankly, they don't have the tools to solve all the problems that we might have. So heading into this, when you look at really what their job is, their job is to promote maximum employment and I think we

can check that box and control prices. So their main purpose right now is to get inflation under control. Now what that means, though, is the piece of the inflation picture that they can control is really the demand side. They can't control the supply side, So what they would actually be intending to do is to get demand to relax to the point where supply can actually meet it

and inflation relax as a little bit as a result. Now, I think some of the pressures come off because oil prices have come down from their peak last week, and we saw some of the moderation and pp I numbers today at least a month over month pp I numbers, So that's promising, but we need to see more sustained relax agent relaxation in inflation. Right now, their hands are tied.

They have to hike, and they have to hike into a period where markets are down, and Liz I mean FED leadership has made clear that they see hikes as the primary tool here that they want to use. But how do you think they use the balance sheet this time around in terms of, you know, quantitative tightening. Yeah. So the thing about hikes is that if they start and move too quickly, or they go too big, it's all about the messaging. It's not necessarily about the move itself.

It's about the messaging. And if the market starts to feel like the Fed is way behind the curve, it might get more scared than it already is. So I think with the hikes, they have to be gentle, and they have to be gradual about it, and they have to message them very clearly, which Jerome Powell did in his testimony a couple of weeks ago. It was very clear, very specific, surprisingly specific about wanting a twenty five basis point hike tomorrow. I think we will continue to hear

very clear messages from them about rate hikes. What they might do with the balance sheet is directly impact the yield curve. So if they start to feel uncomfortable with where the yield curve is or how flat the yield curve is, they may start to signal outright sales from the balance sheet rather than just letting assets roll off. Because that may cause a little bit of a rise in longer term yields and get the spread between the two year and the ten year to widen out a

little bit and less. I want to switch gears a little bit and talk about the composition of who's trading right now, because we've seen a lot of reporting in the last couple of weeks that you have retail investors still buying stocks, but it seems like touch funds and other larger players have been selling. I mean, if you balance those two forces out, first, I'm curious to hear if that's what you're seeing as well. If you balance those two forces out, I mean, does it make sense

to see it seems like institutions are winning right now. Yeah. You know what's actually surprising is that when you look at the flows that had been happening into maybe the end of last week or let's say Thursday of last week, there hadn't been as much selling pressure as you would expect. But the last three days there have been outflows. If you look at sector funds and the money that's coming out of them, and just as a whole in the SMP,

there have been more outflows. So this is going to sound strange, but it was kind of a nice confirmation because everybody was talking about being so bearished, but the flows weren't really reflecting that. And now the flows started to reflect that, and you've got other indicators like call ratio that's been on the rise. You want to see some confirmation of that bearishness. Now, you know if hedge funds and institutional investors are a little bit ahead of

that as far retail investors. That's usually how it works. So if there had been outflows from institutional investors before retail investors start to, I guess join that outflow party. That's where you get more confirmation of Okay, the bearishness is taking cold. Maybe you get to an extreme barishness, and that's usually kind of where you bottom out. Liz Young,

head of investment strategy at Sophie. Liz always great to chat with you, whether it's on Bloomberg Business Week Radio or joining Katie and me on Bloomberg Quick Take Stock at noon Eastern time on weekdays. Lize Young, had of investment Strategy at Sophie, joining us on the phone from New York City. Thanks for listening to Bloomberg Business Week.

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